In order to comply with the off-payroll working rules, ‘reasonable care’ must be taken when determining IR35 status.
So, what exactly is reasonable care when assessing IR35 status? HMRC define reasonable care as acting “in a way that would be expected of a prudent and reasonable person in the client’s position.”
As per the IR35 legislation, HMRC will take into account the circumstances of each case separately. Therefore, providing an independent view of each situation in which reasonable care could be questioned.
Let’s take a look at each of the examples HMRC gives that constitute reasonable care.
This one appears to be relatively simple. In essence, any evidence that helps you reach a conclusion on IR35 status should be recorded and saved. When we talk about the things that help you reach a conclusion, we mean the ‘employment status principles’. These are the tests that are applied in order to determine status and can either be reflected through major status tests such as substitution or more minor tests such as financial risk. Whilst HMRC offer guidance for these status tests, we urge businesses to tread carefully as HMRC have faced criticism from industry experts and tribunal judges for their limited interpretation of case law upon which these principles (status tests) are based.
According to HMRC, using CEST to determine IR35 status qualifies as part of the reasonable care requirement.
Despite this, it is important to remember that CEST is by no means obligatory and there is no certainty that it will stand up in court. There have even been cases in the public sector such as with NHS Digital where they have used the CEST tool but still ended up having to pay back a substantial tax bill for results HMRC deemed to be incorrect. Because of this, we strongly suggest that you seek status review help from an independent third-party provider where possible.
When considering the status tests for IR35, HMRC requires businesses to ‘fact find’. Put simply this means that when you are assessing IR35 status, you should consider the status tests of substitution, control, and mutuality of obligation not only for their individual merits but also their impact on the engagement as a whole.
So, what are the consequences of not taking reasonable care when assessing IR35 status?
It is simple really. If in the course of determining IR35 status, you are found to be neglecting reasonable care then the liability for IR35 will be transferred to you. In other words, you will become the fee-payer in the engagement.
The following are examples of what HMRC has deemed not to constitute reasonable care. The following list is by no means exhaustive.
This is known in the industry as making ‘blanket’ IR35 assessments. In order to show reasonable care in assessing IR35 status, every individual contractor and engagement should be treated as having its own impacting factors and therefore having its own IR35 status.
Often referred to as ‘role-based’ assessments. Similar to the above point, without carrying out individual IR35 assessments, HMRC may infer that you have not taken reasonable care in making status determinations. Role-based determinations should only be used for preliminary status assessment when advertising for new roles.
IR35 is all about ongoing compliance. Where possible, you should continue to perform interim IR35 assessments for the entirety of the engagement. This is especially prudent should any material facts of the engagement change.
Educating all parties is a sure-fire way to ensure every member of the supply chain knows their IR35 obligations. Whether using CEST or an independent third-party like Qdos, your staff should have a level of understanding and knowledge of the legislation and its principles to be able to sign off on any determinations, and also to understand the day-to-day implications of a contractor’s working practices.
Check out the range of bespoke training courses we provide at Qdos here.
This appears to come hand in hand with HMRC’s requirement for you to keep an updated record of their employment status principles. All evidence that relates to IR35 status or could impact the assessment of it should be recorded and should be considered in order to reach a final determination.
In order for an accurate IR35 status determination to be reached, it follows that the person submitting the assessment for review should be provided with both the support and information necessary to complete the SDS process. What is important here is that this person is fully aware of the true reality of the engagement and understands the determination process.
Neglecting to sign-off on the outcome of a SDS constitutes a lack of reasonable care. In order to be sure that the answers given are correct, client approval is required. In order to show reasonable care in this manner, you must review all answers given and, subject to the validity of these answers, either approve or reject the SDS outcome.